Toy Seller FAO Schwarz Runs Into Credit Crunch

The retailer may have to go to Bankruptcy Court for the second time this year, just as the holiday shopping season starts.

NEW YORK — FAO Inc., the parent of FAO Schwarz toy stores, said Monday that its lenders had balked at giving it more financing to get through the holidays, taking it a step closer to a possible bankruptcy filing.

The King of Prussia, Pa.-based retailer was told by lenders that it was in default, after it asked for more money for the holiday sales season.

The lenders said they no longer considered themselves obligated to make further loans or extend letters of credit, FAO said.

The retailer said it was in discussions with the lenders but could give no assurances that the talks would be successful.

Shares of FAO fell 56 cents, or 32%, to $1.17 on Nasdaq.

"FAO sales are declining, meaning one source of capital is insufficient, and supplier credit from vendors was probably insufficient before today," said Richard Hastings, retail analyst with Bernard Sands, which advises vendors.

FAO filed for bankruptcy protection in January after a weak holiday sales season.

In April it emerged, assuring investors it had revamped operations.

"Now they have no commitment from their banks, and that puts an end to vendor credit," he said. "Another bankruptcy filing is a possibility."

A spokesman for an outside public relations firm representing FAO was not available to comment.

"The toy business is dormant all year long and just as we get close to holiday sales season FAO conks out," said Kurt Barnard, head of consultants Retail Forecasting Group. "It's certainly taking them a big step toward filing for bankruptcy again."

The company said Friday that unless sales picked up it would have insufficient liquidity to operate normally in November, the start of the holiday shopping season, typically the most important period of the year for toy retailers.

In a filing with the Securities and Exchange Commission, FAO said it expected it would make about 40% of its annual revenue from, and all of its annual profit -- if any -- in the fourth quarter.

It also asked its banks for more money, and said the request for an over-advance might lead to a notice of default. An over-advance is a loan in advance of sales that allows a company to build inventory before peak sales periods.

Last month the company denied reports that it was not paying its bills and that suppliers had been tightening merchandise credit, and said its business was in order.

"It's not like this came out of nowhere," said Sean McGowan, analyst with Harris Nesbitt Gerard. "Any time a company gets into a cash squeeze it raises concern ... and vendors and lenders are concerned about the pattern emerging here."

FAO, which also owns Zany Brainy and Right Start stores, said Friday that it was considering putting itself up for sale, and needed more money after initial holiday sales came in well below its expectations.

The company said it had asked some vendors to reduce shipments and that it wanted most of them to extend payment dates until the first of the year.